The shift of power in the new US Congress will have major implications for a wide range of stocks. As a result of changed spending priorities, hearings, debates, negotiations, legislation and even stalemates, the fates of many companies will be altered. That opens opportunities for savvy investors. Here’s what an investment pro who specializes in studying government effects on companies sees ahead…
I have about 25% of my fund’s portfolio in health-care stocks—its biggest single allocation—and an additional 8% in stocks related to pharmaceuticals. That’s because Democratic control of the House of Representatives means that the Affordable Care Act, which has extended health insurance to nearly nine million additional people, will not be repealed or further eroded even if the Republican-controlled Senate moves to do so. Under that law, also known as Obamacare, additional insurers have signed up to sell coverage in 2019, and premium increases in 2019 will be the lowest in years. That’s a big win for hospitals whose profits will improve because they are treating fewer uninsured patients…and for “health-tech” companies that help health-care providers manage their costs and improve the efficiency and quality of treatment.
Attractive hospital stock: Encompass Health (EHC) provides postacute services via a network of more than 400 inpatient rehabilitation hospitals, home-health agencies and hospice agencies in 36 states. One-third of patients in the US receive inpatient rehabilitative care at an Encompass Health facility. Recent share price: $74.14.
Attractive health-tech stock: Teladoc Health (TDOC) is the nation’s leading provider of remote medicine by telephone and video conference, which substantially lowers costs compared with using traditional providers. With its network of more than 3,000 board-certified physicians and other health professionals, it has 75% of the current market and should thrive as this market grows rapidly. Recent share price: $64.09.
Fixing the nation’s aging roadways, bridges and ports is one of the rare issues on which President Donald Trump and most Democrats and Republicans in both the House and the Senate are aligned. This type of large-scale federal spending flows directly to construction companies that provide raw materials and engineering firms that plan and oversee the rebuilding projects. Although some in Congress are worried about adding to the swelling federal budget deficit, there’s a good chance that lawmakers will vote to increase the federal gasoline tax to help pay for a bipartisan infrastructure bill. That bill likely will be scaled way back from the $1 trillion package that had been discussed, but even a $50 billion package spread over the next five years would boost the stock prices of infrastructure companies that get federal contracts.
Attractive infrastructure stock: Granite Construction (GVA) benefits in two ways from federal infrastructure spending. It has 50 plants throughout the western US that produce gravel, asphalt and concrete. And it provides consulting and management services for large-scale projects including roads, highways, transit facilities, airports and bridges. Recent share price: $50.60.
This is the second-largest part of my fund’s stock portfolio at 19% of overall assets. That may seem surprising because many investors are dumping financial stocks over concerns that California Democratic Congresswoman Maxine Waters is poised to become chairperson of the powerful House Financial Services Committee. Waters is expected to hold extensive hearings focused on big banks and to oppose loosening the regulatory reins created by the Dodd-Frank reforms after the 2007–2009 financial crisis.
Instead of big banks, I prefer stocks of regional and community banks because the Federal Reserve has eased regulations on them. I also like nontraditional lenders that serve lower-income consumers lacking credit cards or bank accounts. Federal control over their activities has been eased through executive actions from President Trump that are beyond the control of Congress. For example, the Trump appointee heading the Consumer Financial Protection Bureau (CFPB) is reducing or eliminating many Obama-era consumer-protection standards—a move that is fiercely opposed by consumer advocates but that likely will enable these lenders to increase their profits.
Attractive regional bank: KeyCorp (KEY) is a fast-growing bank focused on commercial clients in Ohio and New York. Its 2016 acquisition of First Niagara bank has improved profitability. With $138 billion in assets, KeyCorp qualifies under new Federal Reserve rules that partially scale back compliance tests required of the largest banks. Recent share price: $18.14.
Attractive nontraditional lender: Green Dot (GDOT) is a financial-services company that focuses on the unbanked/underbanked segment of the population and consumers who don’t have credit cards. It offers Visa- and MasterCard-branded prepaid debit cards through convenience stores, pharmacies and other retailers. Other companies use its technology to offer private-label cards such as the Uber debit card and Walmart’s MoneyCard (a prepaid debit card). Recent share price: $81.14.
The current conventional wisdom suggests avoiding defense stocks because defense spending would suffer steep cuts mandated by the Budget Control Act of 2011 unless the divided Congress counteracts that measure. I expect defense contractors to continue to thrive because Democrat Adam Smith, slated to become chairman of the House Armed Services Committee, has a long history of finding compromise with Republicans, who favor increased defense spending. Congress realizes that the US needs to modernize the military to keep pace with ongoing buildups in Russia and China and that the US needs to fund counterterrorism efforts.
Congress has already passed three temporary bills to avoid automatic spending cuts. That has led to a mammoth
$716 billion budget for the Defense Department already approved for fiscal 2019. Attractive defense contractors…
Huntington Ingalls (HII) has built more than 70% of the US Navy’s fleet of warships. As the only US builder of Navy aircraft carriers and one of two builders of nuclear-powered submarines, this company is uniquely positioned to take advantage of a ramp-up in defense spending. Recent share price: $214.85.
CACI International (CACI) doesn’t manufacture weapons. The information-technology company specializes in cybersecurity and Internet-based battle-management software for various branches of the federal government. Recent share price: $168.32.